Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

LOST at Sea

The United Nations Convention on the Law of the Sea — known as UNCLOS or LOST (Law of the Sea Treaty) — recently celebrated its 30th anniversary, but has yet to be ratified by the U.S. Senate.1 Originally drafted in New York City between 1973 and 1982, the Treaty was deemed unacceptable by the Reagan administration. After the fall of the Soviet Union, one of the original treaty’s main proponents, a series of amendments were proposed to meet American objections. The United States signed the amendments, but not the Treaty itself, in 1994. For legal purposes, however, the U.S. government regards the Treaty as customary international law.

Many objections to the Treaty are based on arguments of national sovereignty.2 However, there are very sound economic and environmental reasons why the U.S. Senate should continue to reject ratification.

Internationalization of the Oceans

The fundamental principle of LOST is socialization — or “internationalization,” comparable to nationalization of land or industries — of the world’s oceans and seas. The development of this principle began with Hugo Grotius, whose theory of the “free sea” (mare liberum),asserted the right of the Dutch to use the high seas for trade.3 In contrast, the English argued that the sea could be appropriated like land, and therefore become subject to sovereign jurisdiction (the closed sea or mare clausum).4 As maritime trade grew, freedom of the seas won out in international law, under a compromise whereby maritime sovereignty reached as far as a cannon shot from land (approximately 3 miles). The seas further out were free from claims of sovereignty, although Spain and some other countries claimed longer reaches.5

The Freedom of the Seas was the second of President Woodrow Wilson’s Fourteen Points after World War I. Wilson said:

“Absolute freedom of navigation upon the seas, outside territorial waters, alike in peace and in war, except as the seas may be closed in whole or in part by international action for the enforcement of international covenants.”6

This claim was rejected by Great Britain and other countries. An attempt to codify the law of the sea in a formally agreed upon limit to territorial waters failed at the Hague (Netherlands) in 1930, and many nations began to claim 12 mile limits — most notably China, India and the Soviet Union. From 1946 to 1950, four South American countries (Argentina, Chile, Ecuador and Peru) declared 200 mile limits, claiming the need to protect fish stocks.

In 1958, Iceland declared a 12 mile limit, setting off a series of “Cod Wars” with Great Britain, which included further increases in its territorial claims to 50 miles in 1972 and 200 miles in 1975. Iceland ultimately succeeded in putting fishing around the island under its jurisdiction.

The control of international waters became even more complicated when countries realized that the seabed and its subsoil contained significant natural resources, such as oil, gas and polymetallic nodules. Accordingly, in 1945 President Truman issued a proclamation that asserted:

“Having concern for the urgency of conserving and prudently utilizing its natural resources, the Government of the United States regards the natural resources of the subsoil and sea bed of the continental shelf beneath the high seas but contiguous to the coasts of the United States as appertaining to the United States, subject to its jurisdiction and control. In cases where the continental shelf extends to the shores of another State, or is shared with an adjacent State, the boundary shall be determined by the United States and the State concerned in accordance with equitable principles. The character as high seas of the waters above the continental shelf and the right to their free and unimpeded navigation are in no way thus affected.”7

Increasing tension over territorial waters, exemplified by the cod wars and motivated by the desire to regulate a potential “gold rush” for subsea resources, led to a succession of United Nations conventions on the law of the sea. The first, from 1956-58, led to four treaties that generally restated then-current law, including Truman’s proclamation, but were viewed as unsuccessful. A second convention, in 1960, fractured along the lines of Cold War blocs. A third convention, begun in 1973, aimed to achieve consensus rather than majority approval and continued until 1982.

The Common Heritage of Mankind

Avoiding the 1950s approach of creating separate treaties for separate parts of marine law (such as the continental shelf, the high seas, fishing and mining), the 1982 agreement combined all those treaties under overarching principles. By socializing resources, the Treaty extended to the exploration and exploitation of subsea resources the Grotian principle that the high seas should be open to all. The Treaty Preamble sets out its overall purpose [emphasis in all quotations added]:

“…the area of the seabed and ocean floor and the subsoil thereof, beyond the limits of national jurisdiction, as well as its resources, are the common heritage of mankind, the exploration and exploitation of which shall be carried out for the benefit of mankind as a whole, irrespective of the geographical location of States….”8

The Treaty refers to the seabed as the Area. This is the high seas or collective zone outside the 200-nautical-mile Exclusive Economic Zone off the coast of every sovereign State. A notion integral to the Treaty, repeated in Article 136, is that “The Area and its resources are the common heritage of mankind.”

In order to protect and govern this common heritage, the Treaty creates what is in effect a new world government — a government of the sea. The Treaty sets up a governing organization called the International Seabed Authority (the Authority), to allocate permits to explore and/or exploit the seabed. This provision has remained the sticking point for the United States, which signed an Agreement on the Convention in 1994, but has not yet signed or ratified the Convention itself.

The Economics of LOST

The United States’ primary objection to LOST was Part XI, which governs the Area and sets up the seabed Authority. In order to understand the objection, it is important to understand how the Authority works.

The Authority is governed by an Assembly,in which all member states are represented, and a Council,consisting of 36 members elected from the Assembly according to a formula designed to balance the interests of the states that would engage in exploration and exploitation of resources and states that produce such resources on land.9

States and/or their sponsored contractors must pay the Authority to survey, build on or excavate any resource beyond their Exclusive Economic Zone. The Treaty states, “The coastal State shall make payments or contributions in kind in respect of the exploitation of the non-living resources of the continental shelf beyond 200 nautical miles10 Over time, countries will pay an increasing amount for the privilege of exploiting seabed resources: “Payments and contributions … after the first five years of production…shall be 1 per cent of the value or volume… [and] shall increase by 1 per cent… until the twelfth year.”11 Developing countries are exempt from these payments until they become net exporters of the resource concerned.12 Payments collected by the Authority are to be redistributed “equitably” among nations, “…taking into account the interests and needs of developing States.”13

The Authority’s powers are predicated on the belief that it can manage the global economy and create worldwide growth through production and price controls. For example, the Treaty speaks of the “…increased availability of the minerals derived from the Area as needed in conjunction with minerals derived from other sources, to ensure supplies to consumers of such minerals.”14 It calls for “…the promotion of just and stable prices remunerative to producers and fair to consumers for minerals derived both from the Area and from other sources, and the promotion of long-term equilibrium between supply and demand.”15 This could include price controls for “…the protection of developing countries from adverse effects on their economies or on their export earnings resulting from a reduction in the price of an affected mineral, or in the volume of exports of that mineral, to the extent that such reduction is caused by activities in the Area.”16 The Treaty would allow the Authority to inject itself into any negotiations among signatory countries, stating that “The Authority shall have the right to participate in any commodity conference dealing with those commodities and in which all interested parties including both producers and consumers participate.”17 The exercise of the Authority’s powers are guided by an Economic Planning Commission, consisting of 15 representatives nominated by member states18

Finally, the Authority has the power to set up the Enterprise — an international version of a nationalized industry — for the purpose of direct exploration and exploitation of resources by the Authority. As the Treaty states, “The Enterprise shall be the organ of the Authority which shall carry out activities in the Area directly, pursuant to article 153, paragraph 2(a), as well as the transporting, processing and marketing of minerals recovered from the Area.”19

Some of these provisions have been qualified by the 1994 agreement on implementation, but they all remain part of the text of the convention.

The Economic Case Against the Authority

Anyone familiar with free market principles will quickly recognize the economic issues involved. When this Orwellian Authority was originally conceived, the Soviet Union still provided what many thought was a viable model of economic control. Even in the West, many of the initial Treaty drafters came from states that had nationalized many industries. These industries were politically directed according to economic plans. The Authority is clearly an expression of this way of thinking.

Yet, one after another command and control economies collapsed in the 1980s and 1990s. There were three principal reasons for this collapse. The first is ineffectiveness. Command and control regimes are often more interested in the rules than the effect of the rules, and in proclaiming judgments rather than enforcing them. This means that parties who find the rules inconvenient simply ignore them. At the national level, this leads to black markets. At the international level it leads to ineffective treaties. Second, centralized economic planning breeds inefficiency, most often seen in the misallocation of resources. All the economic planning committees manned by all the professors in the world cannot overcome the fact that they suffer from what economist Friedrich Hayek called “the fatal conceit.” They cannot know more than the distributed intelligence of markets how to better allocate resources. Finally, the ability to pick winners and losers in the allocation game means that efforts will be made to tip the scales in favor of one nation or another. At best, this leads to extensive lobbying; at worst, it leads to corruption.

The Treaty Is Ineffective. The Treaty’s ineffectiveness was exemplified by events in the South China Sea in September 2012. China deployed six surveillance ships in response to the Japanese government’s attempt to buy the disputed Senkaku islands (which the Chinese call the Daioyus) from their current owner, a wealthy Japanese family.20 Both countries are signatories to LOST, which was supposed to settle disputes over maritime boundaries by creating the International Tribunal for the Law of the Sea.

The Tribunal has so far largely failed to settle such disputes. The Senkaku/Daioyus dispute is not the first case brought before the Tribunal, whose approach seems to be to let countries talk among themselves until they reach a solution. The court established to settle disputes has repeatedly abdicated its responsibility, while continuing to claim jurisdiction. Frustration with this process has led at least one party to return to gunboat diplomacy. Despite filing a lawsuit with the Tribunal, China appears to be dissatisfied with a legalistic approach. China Ministry of Foreign Affairs Spokesperson Hong Lei stated, “Isn’t it a weird thing in international affairs to submit a sovereign country’s territory to international arbitration? What a chaos the world will be in if this happens?”21

Virtually all the cases thus far have involved impounding fishing vessels, but the Tribunal has not actually finally settled any serious international dispute; thus, regardless of the merits of the case, China’s frustration is not surprising. Where it has acted, the Tribunal has essentially told the parties to sort the issues out amongst themselves — as in the Southern Bluefin Tuna case examined below.

The Tribunal did decide one case, between Bangladesh and Myanmar, but that suit only arose due to confusion over the application of the Treaty in the first place, leading Eric Posner, the Kirkland and Ellis Professor of Law at the University of Chicago, and John Yoo, Professor of Law at the University of California Berkeley, to conclude:

“Early indicators suggest that the ITLOS will not be an effective international Tribunal... Because of the independence of the tribunal, states have little influence over how it resolves disputes. They cannot expect outcomes that are satisfactory to both parties, and thus they cannot expect widespread compliance. If compliance is likely to be weak, there is little point in using the Tribunal in the first place.”22

Another source of the Tribunal’s ineffectiveness arises from its very constitution. As Cato Institute Senior Fellow Doug Bandow points out:

“The new International Tribunal for the Law of the Sea is supposed to offer dispassionate adjudication of disputes. Yet membership is decided by quota: Each “geographical group” is to have at least three representatives. In its early days the Tribunal served as a dumping ground for frustrated LOST politicos such as Cameroon’s Paul Engo and Tanzania’s Joseph Warioba, both of whom once had hoped to become the Authority’s Secretary-General.”23

Ineffectiveness has an economic cost. States and companies will defer investment in disputed areas, as there is little hope for speedy resolution. Thus, as cases remain tied up in costly legal knots, areas become off-limits for development, and all economic benefit is lost.

The Treaty Misallocates Resources. More seriously, the Treaty is responsible for a significant misallocation of resources when it comes to the Authority’s powers. Indeed, almost all deep sea mining performed under its jurisdiction by companies from industrialized states will happen at a loss. Industrialized state governments are required to levy fees and royalties to subsidize both the Enterprise and the activities of developing states. Setting fees relies on two provisions, outlined in Annex 8 to the Agreement, that amends to the Treaty. The provisions are vague, which creates significant cost and uncertainty:

“(a) The system of payments to the Authority shall be fair both to the contractor and to the Authority and shall provide adequate means of determining compliance by the contractor with such system;

(b) The rates of payments under the system shall be within the range of those prevailing in respect of land-based mining of the same or similar minerals in order to avoid giving deep seabed miners an artificial competitive advantage or imposing on them a competitive disadvantage;”

These provisions essentially force a contracting company to pay more than it would otherwise in order to be fair to the Authority. Because seabed mining is more expensive than land-based mining, paying for the privilege at the same rates as land-based mining adds a second layer of competitive disadvantage, despite what the Annex text purports. In all probability, these extra fees mean that any mining activities will take place at a loss, arguably the reason why progress in subsea mining has not met expectations when the Treaty was drafted.

Because the Treaty misallocates resources, seabed mining has been deferred, resulting in more mining on land. Land-based mining operations are very happy with this arrangement, and are even represented in their own chamber of the Council. 24

The net result: an institutionalized subsidy to land-based mining operations from the very existence of the Treaty, because the Treaty deters effective seabed competition.

The Treaty Institutionalizes Corruption. Misallocation of resources merges with the third element of command and control systems in the Treaty: corruption. In most cases, corruption is illegal and behind the scenes — a bribe here, a payoff there. In the case of LOST, however, the corruption is institutionalized. From the very beginning, LOST was designed as a payoff to the Group of 77 nonindustrialized states. As Doug Bandow notes:

“There never was any need to tie seabed mining to navigation, exclusive economic zones, and the other maritime provisions. Doing so enabled the Group of 77 to demand a payoff for accepting maritime freedoms that were already widely accepted. Seabed mining requires no international bureaucracy, but simply a system for recording seabed claims and resolving conﬂicts. The environmental impact of mining can be addressed through a separate convention among states whose citizens or companies participate in mining.”25

The 1994 revisions were supposed to lessen the redistribution inherent in the original Treaty, but Section 7 of the Annex sets up a fund that takes “into particular consideration” not just developing states but “peoples who have not attained full independence or other self-governing status.” This Treaty provision was clearly intended to help the Palestinian Liberation Organization, which had not yet achieved governmental status with the Palestinian Authority, but the provision could clearly be used to fund other separatist and/or terrorist groups. Because LOST operates under consensus, a government could object to such funding as long as it has a seat on the Finance Committee, but as Bandow suggests, “the LOST regime would be so politicized that a ‘no’ vote may have to be traded away some day to win other battles.”26

Indeed, most of the votes relating to the Authority so far have been politicized, with candidates for Authority committees “persuaded” to withdraw. The payoffs and backroom dealing inherent in the structure of the Authority create other of economic costs. First, the formal cost. If the United States joins, it will be required to provide 25 percent of the Authority’s budget until the Authority has a large enough independent revenue stream to finance itself.

There are also the costs from the redistribution of payments from the Authority to governments of developing countries. Many of these governments are less than savory, and traditional aid funds or revenues from existing natural resources are already being channeled into the pockets of the governing class and used to keep them in power. An additional revenue stream from the Authority would further cement their positions and worsen the condition of their peoples, further suppressing global growth. Add to this the aforementioned risk of allocating funds to separatist or terrorist organizations, which could turn the Authority into a backdoor source of funding for the arms trade. Thus, if the Authority works in the way it is constituted, it would represent a perverse cost to the poorest people in the world.

Thankfully, the deterrent effect the Authority has had on seabed mining has thus far limited its operations, due to financial constraints:

Of the 163 countries who ratified the Treaty, 44 nations were behind in their payments to the Authority as of June 2011,27 and in 2007-2008 alone arrears reached over €3 million.28

Furthermore, only 12 contracts have so far been signed with the Authority, mostly from academic research organizations and/or centralized states.29

Despite the fact that the Treaty has been in force for 18 years of its 30 year existence, it has little to show for itself. The reticence of the United States to join LOST cannot be blamed for this lack of activity. The mere existence of the Authority has clearly had a significant deterrent effect on the exploration and exploitation of subsea resources by its member states.

Answering the Economic Arguments for the Treaty

There are two main economic arguments advanced in favor of the United States joining LOST. The first is that uncertainty is preventing the United States from developing natural resources, particularly in the Arctic. The second, newer argument is that LOST would encourage the development of resources by instituting a sound property rights regime in the seabed of the high seas. Neither of these arguments has merit.

Can Resources Be Developed without LOST? The first argument — that LOST will advance the development of the seabed — is outlined in a letter from the U.S. Chamber of Commerce, sent to the U.S. Senate in July 2012:

“America’s extended continental shelf, which in some areas extends hundreds of miles beyond U.S. territorial waters, contains abundant oil and natural gas reserves that can provide reliable, affordable energy to America’s homes and factories for decades to come — but only if the Senate acts to approve Law of the Sea. Likewise, by joining the Convention, U.S. companies would gain exclusive access to abundant rare earth mineral resources that are essential to high-tech manufacturing. China currently controls 90 percent of the world supply of rare earth minerals. Law of the Sea represents America’s best opportunity to take control of its own resource destiny. No U.S. company will make the multi-billion-dollar investments required to recover these resources without the legal certainty the Convention provides.”30

This argument is demonstrably false. U.S. companies are already successfully investing in an area of the extended continental shelf — the “western gap” in the Gulf of Mexico.31 There are two areas of submerged continental shelf in the Gulf, outside the Exclusive Economic Zones of both the United States and Mexico, known as the Western Gap and the Eastern Gap. The Eastern Gap shares a nautical boundary with Cuba, and its precise boundaries have not been negotiated. The boundaries of the Western Gap, however, were defined by a treaty signed with Mexico in June 2000.

This bilateral treaty has allowed both nations to proceed with confidence in developing the extended continental shelf in the Western Gap. No objections have been raised to the bilateral treaty and none are expected. As a result, the U.S. Bureau of Ocean Energy Management has sold development rights in the Western Gap in several auctions since the treaty was ratified in 2001.

Clearly, companies are willing to make multimillion dollar investments to recover resources even “without the legal certainty the Convention provides,” as the U.S. Chamber put it.

What of the Arctic? A 2011 Bloomberg BusinessWeek editorial argued:

“The U.S. continental shelf off Alaska extends more than 600 miles into the Arctic Ocean. American companies have been reluctant to invest in exploiting this underwater terrain, which contains vast untapped reserves of oil and natural gas. That’s because the U.S., as a nonparticipant in the sea convention, has no standing to defend its ownership of any treasures that are found there.”32

Yet this is exactly the same case as in the Gulf of Mexico. Only three nations contest the ownership of resources in the extended North American continental shelf in the Arctic: the United States, Canada and Russia. American relations with Canada are friendly; therefore, a United States-Mexico-style treaty with Canada demarcating appropriate lines north of Alaska should be relatively easy to achieve. Russia might be perceived as a more intractable problem; but a 1990 treaty between the United States and the Soviet Union defines the maritime boundary between the two powers.33

Under the Treaty, Russia has claimed vast areas beneath the Arctic Ocean, but these claims in no way infringe upon the 1990 Treaty. Actually, they are a challenge to Canada rather than the United States. South of the Arctic Ocean, the treaty line protects U.S. claims to large areas of extended continental shelf in the Bering Sea and in the Pacific Ocean southwest of the Alaskan Aleutian Islands. Accordingly, there is no barrier (barring the low one of a necessity to negotiate a treaty with Canada) to the United States developing the extended continental shelf in the Arctic and its environs in the same way it has in the Western Gap.

As for the ability to develop deep sea resources, the United States has a clear position, as close to the Grotian and Wilsonian ideals of the free sea as one can get: “Like the fish of the high seas the minerals of the deep seabed are open to anyone to take.”34 This principle is also embodied in the Deep Seabed Hard Mineral Resources Act of 1980, which guarantees the right of U.S. citizens and corporations to explore and develop such resources regardless of whether the United States accedes to the Treaty.

Does LOST Institute Property Rights? Like the fish of the sea, open access to deep sea minerals could produce what economists term a “tragedy of the commons.”35 Free access to a resource usually means that the first person to get to the resource takes as much of it as he can, without regard to the sustainability or preservation of the resource. In the fishing industry, free access has led to overfishing and the collapse of fish stocks in the high seas— a problem exacerbated by the subsidies some countries give to their deep sea fleets. With minerals, this access could lead to rapid depletion of the resources.

Therefore, some Treaty advocates, most notably the Institute for Liberty, have argued that ratification is necessary to provide a stable regime of property rights. The Institute’s President, Andrew Langer, reasons:

“[Peruvian economist Hernando] DeSoto talks about the importance of “clearing title” in his research. He writes quite favorably about the settlement of the American West, in which territory acquired by the United States was parceled out by the federal government, who in turn, cleared title to those parcels in order to secure settlement. And while the state governments could have done this themselves when they transformed from territories to states, they decided to send that title clearing and parceling responsibility to the federal government. Had they not, chaos would have ensued, and the West would not have been settled.

“That is, in essence, what the Law of the Sea Treaty does. It puts the responsibility for clearing title and parceling out the commons in the hands of the International Seabed Authority, allowing for a strong framework of property rights to give interested parties the certainty to make their investments.”36

While superficially attractive, the argument does not stand up to scrutiny. The Authority does not provide property rights in any recognizable sense of the term.

As economists Bruce Yandle and Andrew Morriss have pointed out, a genuine property right has three characteristics: It is capable of being defined, and of being defended, and is alienable — it can be transferred to another.37 While the contracts awarded by the Authority are certainly definable, in certain circumstances they can be abrogated by the Authority without compensation. The Authority also has discretion over transfers of mining rights. While the Authority is supposedly prohibited from unreasonable prohibition of transfers, the bureaucratic nature of the Authority might very well mean that this rule is not followed in practice. No property right exists if it can be abrogated or transfer can be stopped. This is not surprising, given the genesis of the Treaty in the command-and-control era. Many of the drafting parties had no appreciable property rights, and the 1994 revisions do not significantly address this point.

It is an odd sort of property right that allows another party the right to take half for itself. That is the import of the “site banking” provision of the Treaty:

“Each application, other than those submitted by the Enterprise or by any other entities for reserved areas, shall cover a total area…sufficiently large and of sufficient estimated commercial value to allow two mining operations... Without prejudice to the powers of the Authority pursuant to article 17 of this Annex, the data to be submitted concerning polymetallic nodules shall relate to mapping, sampling, the abundance of nodules, and their metal content. Within 45 days of receiving such data, the Authority shall designate which part is to be reserved solely for the conduct of activities by the Authority through the Enterprise or in association with developing States. The area designated shall become a reserved area as soon as the plan of work for the non-reserved area is approved and the contract is signed.”38

Thus, although the property right is defined, it is defined only on the Authority’s collectivist terms.

The development of deep sea mining technologies provides another approach to property rights that does not depend on a massive bureaucracy. Under the doctrine of property rights first developed by John Locke, a resource becomes a person’s property once he has mixed his labor with it. While difficult to apply to fish stocks (although not impossible, as New Zealand has shown), the principle should be easier to apply to deep sea mining.39 The presence of work sites is itself a marker — a claim— to a property right. Those rights could conceivably be defended under U.S. law, such as the aforementioned Deep Seabed Hard Mineral Resources Act, without any need for an international regime. This would provide for DeSoto-style titling much more effectively than LOST.

Regarding LOST as an acceptable property rights model suggests that similar measures could be used to internationalize rather than privatize development of extraterrestrial bodies, such as the Moon. As such, it is an alarming precedent.

Moreover, the Treaty is significantly hostile to property rights in another sphere: intellectual property. The initial Treaty envisaged a regime in which contracting parties would be mandated to transfer mining technology to developing world states:

“[1b] [The Authority shall] “promote and encourage the transfer to developing States of such technology and scientific knowledge.”

[2] “To this end the Authority and States Parties shall cooperate in promoting the transfer of technology and scientific knowledge relating to activities in the Area so that the Enterprise and all States Parties may benefit therefrom. In particular they shall initiate and promote:”

[a] “programmes for the transfer of technology to the Enterprise and to developing States with regard to activities in the Area, including, inter alia, facilitating the access of the Enterprise and of developing States to the relevant technology, under fair and reasonable terms and conditions;”

[b] “measures directed towards the advancement of the technology of the Enterprise and the domestic technology of developing States, particularly by providing opportunities to personnel from the Enterprise and from developing States for training in marine science and technology and for their full participation in activities in the Area.”40

“States shall, directly or through competent international organizations:”

[a] “promote programmes of scientific, educational, technical and other assistance to developing States for the protection and preservation of the marine environment and the prevention, reduction and control of marine pollution. Such assistance shall include, inter alia:”

[i] “training of their scientific and technical personnel;”

[ii] “facilitating their participation in relevant international programmes;”

[iii] “supplying them with necessary equipment and facilities;”

[iv] “enhancing their capacity to manufacture such equipment;”

[v] “advice on and developing facilities for research, monitoring, educational and other programmes;”41

“Developing States shall, for the purposes of prevention, reduction and control of pollution of the marine environment or minimization of its effects, be granted preference by international organizations in:”

[a]”the allocation of appropriate funds and technical assistance.”42

The problem of intellectual property protections was supposedly solved in the 1994 agreement, but it is vague, and the Authority’s latent powers remain to make it a continuing issue. Sponsoring states are still required to facilitate technology transfer “if the Enterprise or developing states are unable to obtain” the advanced equipment commercially. Thus, if a contractor develops a breakthrough mining technology, it will be compelled to sell it commercially to rivals or face the prospect of giving it away to the Enterprise (a direct competitor) and developing states. Neither of these options will be attractive to an entrepreneurial company, thereby further deterring investment in deep sea mining Research and Development. (Defense technology transfers are also a concern, but beyond the scope of this study.)

Arguably, the Treaty is hostile to the development of deep sea property rights. One final point should make this clear. Some, such as former Malaysian Prime Minister Mahathir Min Mohammad, have used the “common heritage of mankind” principle to assert that “all the unclaimed wealth of this earth” is collectively owned by all the nations of the earth.43 Nothing could be more hostile to the idea of future private property and wealth than that statement.

Summary: The Economic Case Against LOST. The economic case against LOST can be summarized as follows. The Treaty:

Utilizes a failed economic model to govern the ocean floors.

Provides an ineffective means for resolution of disputes.

Forces contractors to subsidize the Authority and other parties, almost certainly ensuring contractors will operate at a loss.

Is structured so as to provide a revenue stream for developing states and others.

By subsidizing harmful regimes, it may decrease global welfare.

Fails to provide certainty for U.S. developers on the extended continental shelf.

Fails to provide meaningful property rights.

Requires technology transfer that suppresses research and development; and, therefore, has deterred the development of the ocean floors.

There is no economic case for the United States to ratify LOST; indeed, there is a substantial economic case for its global repudiation.

The Environmental Effects of LOST

The Treaty is supposedly designed to protect the environment, but like most such measures, its adoption by the United States would open it up to endless pressure from the international environmental movement that would likely result in substantial costs to land-based extractive industries. Furthermore, the International Tribunal has embraced an approach that has significant implications for future development of marine resources.

Anti-Pollution Measures. The environmental dangers of the treaty are contained in Part XII, most significantly:

[3] “The measures taken pursuant to this Part shall deal with all sources of pollution of the marine environment. These measures shall include, inter alia, those designed to minimize to the fullest possible extent:”

[a] “the release of toxic, harmful or noxious substances, especially those which are persistent, from land-based sources, from or through the atmosphere or by dumping…”44

Those who are concerned that the marine environment is being damaged by pollution could put their case before the Tribunal, but the obligations of Part XII would have a special effect on the United States, where citizens may sue to ensure the government follows its laws. Under the U.S. Constitution, international treaties have the force of law. Ratifying LOST would therefore enable environmental groups to sue to ensure the release of toxic substances is minimized “to the fullest possible extent” if there is a chance the material will enter the marine environment.

Consider: The nation’s coal-fired power plants release mercury into the atmosphere. Some of this mercury consolidates in rivers, and eventually reaches the ocean. As a result, fish that swim in the ocean have slightly higher levels of mercury in their systems. Sharks that eat these fish have even higher mercury concentrations. The concern that pregnant mothers who eat shark meat are damaging the cognitive development of their unborn children has led environmentalists to demand that the U.S. Environmental Protection Agency issue regulations to reduce the risk to unborn children.

However, consider what the Treaty text implies. There is no requirement to prove that the emissions actually cause significant harm. If the substance emitted is “harmful” to any degree, states are simply required to minimize emissions “to the fullest possible extent.” To all practical purposes, taking the Treaty at its word would require the closure of most if not all coal-fired electricity generation in the United States.

This kind of activism has not taken place in any of the other signatory states, likely because they offer fewer opportunities for concerned citizens to require their governments to follow the spirit and word of the Treaty. In the United States, however, environmental groups would probably sue the day after formal ratification, and the courts would be unlikely to throw out their challenges.

Global Warming. Mercury is just the tip of the iceberg. The Environmental Protection Agency has made a determination that carbon dioxide is harmful to human health, and some scientists have claimed that the substance has been accumulating in the oceans, leading to rising acidity and harm to marine life, such as shellfish. 45 Thus, environmentalists would likely sue to ban any emission of carbon dioxide beyond the natural carbon cycle. In practice, that would mean the end of fossil fuels in the United States. Oil and natural gas also emit large amounts of carbon dioxide into the atmosphere every day. While minimizing their use “to the fullest possible extent” may not be practical, and would be extraordinarily expensive, it is possible. Wind, geothermal and solar power would become the only means of generating electricity (nuclear energy would be unlikely to survive a LOST challenge), and electric cars would become mandatory. The courts would probably set a deadline for the conversion, so as not to destroy the economy overnight, but the cost of such a conversion would cripple America for generations, especially if other nations continue to use fossil fuel, as they almost certainly will.

Of course, when the Treaty was negotiated, and even when the amendments were agreed to in 1994, global warming was not the major international concern it is today. Therefore, major emitters of carbon dioxide, such as the United States, China and other rapidly industrializing states, might attempt to revise the Treaty to exclude carbon dioxide (and potentially other greenhouse gases) from Article 194. However, amending the Treaty is extremely difficult, requiring half the parties to first agree to consider an amendment, followed by a convention that would decide on the amendment by consensus. Furthermore, the parties to the Treaty are primarily developing nations that continue to express significant objections to the emission of carbon dioxide by industrialized nations. There is a simplified amendment procedure, but if a single state objects the process is derailed. Thus, amendment offers no hope to save America from this or any other aspect of the Treaty.

It might also be argued that Article 194 is tempered by Article 207 (Pollution from Land-based Sources), which states:

States shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment from land-based sources, including rivers, estuaries, pipelines and outfall structures, taking into account internationally agreed rules, standards and recommended practices and procedures.

States shall take other measures as may be necessary to prevent, reduce and control such pollution.

States shall endeavor to harmonize their policies in this connection at the appropriate regional level.

States, acting especially through competent international organizations or diplomatic conference, shall endeavor to establish global and regional rules, standards and recommended practices and procedures to prevent, reduce and control pollution of the marine environment from land-based sources, taking into account characteristic regional features, the economic capacity of developing States and their need for economic development. Such rules, standards and recommended practices and procedures shall be re-examined from time to time as necessary.

Laws, regulations, measures, rules, standards and recommended practices and procedures referred to in paragraphs 1, 2 and 4 shall include those designed to minimize, to the fullest extent possible, the release of toxic, harmful or noxious substances, especially those which are persistent, into the marine environment.

But, as section 2 abovemakes clear, the idea that states should adopt laws to “prevent, reduce and control” harmful substances in no way reduces the burden to minimize their release “to the fullest possible extent.” In fact, Article 207 increases the burden by requiring the United States to pass laws and regulations to achieve these ends and to enter into further treaties at both the regional and global level to reduce emissions, while giving developing states a pass on the same requirement. Thus, accession to the Treaty would mean a significant increase in the amount of environmental law in the United States.

The Treaty would also significantly reduce the United States’ discretion in applying laws. America’s constitutional system gives its courts significant powers of judicial review. In the area of international rules on environmental pollution, however, accession to LOST would delegate those powers to the Tribunal or a similar court. That is the missed meaning of Article 213, on enforcement with respect to pollution from land-based sources:

“States shall enforce their laws and regulations adopted in accordance with article 207 and shall adopt laws and regulations and take other measures necessary to implement applicable international rules and standards established through competent international organizations or diplomatic conference to prevent, reduce and control pollution of the marine environment from land-based sources.”

As Christopher C. Horner, attorney and senior fellow with the Competitive Enterprise Institute, has noted, “That is a power grab not even the Kyoto Treaty dared attempt. The United States rejects Kyoto; why would we join Kyoto with a court?”46

Recognizing that the combined import of these sections is, as Horner suggests, a deal-breaker for most Americans and especially their legislators, Treaty supporters have argued that the text does not mean what it says. One of the leading academic supporters of LOST ratification, Bernard H. Oxman, a University of Miami law professor (and a leading candidate for U.S. nomination to the Tribunal), said in a Senate hearing that Article 213 was merely “hortatory” and, “It is not possible as I see it for us to violate that provision.”47 In response, Senator David Vitter (R-La.) asked:48 “If it is not possible for an individual state to violate the provision, why is it in the treaty?” Oxman replied that the provision was designed “to encourage states to deal with the question nationally and internationally but does not tell them precisely what to do.” Vitter countered: “It seems odd to put a feel-good provision like that with the title, ‘Enforcement with respect to pollution from land-based sources,’ because this treaty does have enforcement mechanisms.”

Indeed, many environmentalists have great hope that the Treaty will actually provide a “Kyoto with a court.” William Burns, director of the Energy Policy & Climate program at Johns Hopkins University, wrote an extensive article in 2007 examining how the various provisions of LOST could be used to force the United States to take action to reduce greenhouse gas emissions.49 In it, he calls the Treaty a “promising instrument through which such action might be taken, given its broad definition of pollution to the marine environment and the dispute resolution mechanisms contained within its provisions” and notes that “litigation [over climate] is unavoidable.”

Therefore, U.S. accession to LOST would surely be followed immediately by concerted efforts at national and international levels to use the Treaty to force drastic emissions reductions by the United States.

It should also be noted that ratification of the Treaty would mark a significant departure from the traditional U.S. attitude toward international enforcement treaties. As international law expert Jeremy Rabkin of George Mason University noted:

“[I]t is one thing to agree to a common standard and another thing to be bound by the decisions of an ongoing regulatory council in which the United States can be easily outvoted. It is one thing to agree to submit particular disputes to international arbitration, with the consent of both parties. It is entirely another thing to establish an ongoing court, with mandatory jurisdiction over important matters and an open-ended claim to “advise” on the law apart from particular disputes. It is something else again to embrace a court that, being permanent, may be prey to all the temptations of judicial activism, to extending its authority by enlarging its jurisdiction and winning popularity by playing favorites in its judgments… The U.N. Convention on the Law of the Sea is not simply a bad deal for the United States. It is a very bad precedent.”50

Precautionary Principle. Another environmental aspect of LOST is its embrace of the precautionary principle in the Tribunal’s decisions. The United Nations established the precautionary principle in Principle 15 of the Rio Declaration, which reads “Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.”51

The precautionary principle has been adopted wholesale in many regulations, particularly in the European Union, aimed at banning or restricting activities when there has been an allegation of potential harm. It has been used, for instance, to restrict the use of genetically-modified organisms based on thus far unsubstantiated fears of harm to humanity, wildlife, or the environment generally. As Henry I. Miller, the Robert Wesson Fellow in Scientific Philosophy and Public Policy at the Hoover Institution and Gregory Conko, senior fellow with the Competitive Enterprise Institute, have noted:

“Application of the precautionary principle has already elicited unscientific, discriminatory policies that inflate the costs of research, inhibit the development of new products, divert and waste resources, and restrict consumer choice. The excessive and wrong-headed regulation of the new biotechnology is one particularly egregious example. Further encroachment of precautionary regulation into other areas of domestic and international health and safety standards will create a kind of “open sesame” that government officials could invoke whenever they wish arbitrarily to introduce new barriers to trade, or simply to yield disingenuously to the demands of antitechnology activists.”52

It would therefore be disturbing to see precautionary thinking permeate the operation and application of the Treaty, given the potential effects on trade, innovation, and the economy at large. Yet that is precisely what has happened. In the Southern Bluefin Tuna Case (Australia and New Zealand v. Japan) on the over-fishing of Bluefin tuna, the Tribunal implicitly referred to the precautionary principle in its verdict, which generally instructed the parties to sort the matter out among themselves:

“Considering that, although the Tribunal cannot conclusively assess the scientific evidence presented by the parties, it finds that measures should be taken as a matter of urgency to preserve the rights of the parties and to avert further deterioration of the southern Bluefin tuna stock.”53

As Alana Rubin of the Michigan State University’s Animal Legal and Historical Center points out, this paragraph, “...further supported by paragraphs 77 and 79, refers to the scientific uncertainty regarding the stock of southern Bluefin tuna, and due to this uncertainty, conservation measures must be taken to prevent serious harm to the stock. In making its decision, the Tribunal noted that all parties agreed that the stock was at its lowest levels historically and that, therefore, Japan, Australia and New Zealand must implement conservation measures. In effect, the scientific evidence, even if ‘uncertain’ triggered the ITLOS’ [Tribunal’s] application of the precautionary principle. Thus, in making its decision to stop Japan’s actions, the ITLOS [Tribunal] applied the precautionary principle.”54

This assessment was confirmed by Rudiger Wolfrum, president of the Tribunal, in a speech to the International Law Commission in 2008, saying:

“The jurisprudence of the ILC has hitherto not accepted the precautionary approach as a binding principle of international law. The Tribunal, when asked to prescribe provisional measures for the protection and conservation of southern Bluefin tuna fish stocks, nevertheless relied upon such principle. In view of the uncertainty of available scientific data, the Tribunal held that the parties to the dispute should act “with prudence and caution.”55

Given the dangers to trade, innovation, and the economy inherent in widespread application of the precautionary principle, the United States would be unwise to accede to LOST. The precautionary principle could conceivably be used under LOST to reduce maritime trade based on, for instance, the damage to whales caused by large trading vessels such as oil tankers or container ships. The precautionary principle could be held to apply in this case because a scientific case could be made that over the years this often unreported damage has significantly harmed whale population numbers. Similarly, in an attempt to reduce submarine military activity, environmentalists have already argued that deep sea mining techniques using sonar could be viewed as harmful to whale navigation. Finally, the precautionary principle and the rules against harmful substances reaching the ocean could be combined so that any suggestion that a substance might be harmful would be sufficient to compel the United States to regulate out of existence the activities that would generate that substance.

One note of good news regarding the application of the precautionary principle by the Tribunal. In its judgment on the 2001 Mixed Oxide Fuel plant case between the United Kingdom and Ireland,the Tribunal ruled that it was incumbent upon Ireland to demonstrate the seriousness of the potential harm to the marine environment and that it had failed to do so.56 Thus, the Tribunal has not allowed any allegation of any potential harm to halt activities using the precautionary principle. Most of the truly costly applications of the precautionary principle, however, such as with allegations of global warming, are in areas where potential plaintiffs are able to allege substantial harm.

As Fred Smith, president and founder of the Competitive Enterprise Institute, has suggested, the European embrace of the precautionary principle stems from the Napoleonic idea that the state should codify what is allowed, and forbid everything else, in contrast to with the Anglo-American ideal of “reserved rights” where what is not forbidden is allowed. Smith wryly remarked, “Regulatory Bonaparte-ism may appeal to some Europeans, but it is not a model to which America should ever subject itself.”57

Conclusion

Some advocates argue that because the Treaty has been accepted as customary international law, the United States would lose nothing by acceding to it, and would in fact gain by having a seat at the table. For instance, Senator John Kerry (D-Mass.) said, “We’ve effectively lived by the terms of the Treaty, even as a non-party and a holdout. We live by the rules, but we don’t shape the rules.”58

As this study has clarified, the United States would stand to lose from ratification of the Treaty. The direct economic costs would be significant, global welfare could very well suffer, and when combined with the potential for environmental litigation, the total cost could be disastrous. The Treaty’s very structure would reduce the United States to one voice at a noisy dinner table — a voice that could find itself at best paying for the entire meal, and at worst find itself on the menu. All of the proclaimed benefits of LOST can be achieved by other means. In the end, as far as the United States is concerned, the Treaty deserves to be lost at sea.

Appendix

Article 164: The Economic Planning Commission59

1. Members of the Economic Planning Commission shall have appropriate qualifications such as those relevant to mining, management of mineral resource activities, international trade or international economics. The Council shall endeavour to ensure that the membership of the Commission reflects all appropriate qualifications. The Commission shall include at least two members from developing States whose exports of the categories of minerals to be derived from the Area have a substantial bearing upon their economies.

2. The Commission shall:

(a) propose, upon the request of the Council, measures to implement decisions relating to activities in the Area taken in accordance with this Convention;

(b) review the trends of and the factors affecting supply, demand and prices of minerals which may be derived from the Area, bearing in mind the interests of both importing and exporting countries, and in particular of the developing States among them;

(c) examine any situation likely to lead to the adverse effects referred to in article 150, subparagraph (h), brought to its attention by the State Party or States Parties concerned, and make appropriate recommendations to the Council;

(d) propose to the Council for submission to the Assembly, as provided in article 151, paragraph 10, a system of compensation or other measures of economic adjustment assistance for developing States which suffer adverse effects caused by activities in the Area. The Commission shall make the recommendations to the Council that are necessary for the application of the system or other measures adopted by the Assembly in specific cases.

Endnotes

1. United Nations, “United Nations Conventions On The Law Of The Sea,” December 1982. Available at http://www.un.org/Depts/los/convention_agreements/texts/unclos/closindx.htm.

6. Woodrow Wilson, address to a Joint Session of Congress, January 8, 1918.

7. President Harry S. Truman, Proclamation 2667, “Policy of the United States with Respect to the Natural Resources of the Subsoil and Sea Bed of the Continental Shelf, Sea Bed and Fisheries On High Seas,” September 28, 1945, and President Harry S. Truman, Proclamation 2668, “Policy of the United States with Respect to Coastal Fisheries in Certain Areas of the High Seas,” September 28, 1945.

8. United Nations, “United Nations Conventions On The Law Of The Sea,” December 1982. Available at http://www.un.org/Depts/los/convention_agreements/texts/unclos/closindx.htm.

24. “Agreement relating to the Implementation of Part XI of the United Nations Convention on the Law of the Sea of 10 December 1982,” July 28,1994, Annex Section 3, Paragraph 15.

25. Doug Bandow, “The Law of the Sea Treaty: Impeding American Entrepreneurship and Investment.”

26. Ibid.

27. Roland Tricot, “EU Statement - United Nations SPLOS-ITLOS: Report of International Tribunal for Law of the Sea,” International Tribunal for the Law of the Sea,” New York, June 2011. Available at http://www.eu-un.europa.eu/articles/en/article_11173_en.htm.

28. Statement By Rüdiger Wolfrum, President of the International Tribunal For The Law Of The Sea, on “The Report Of The Tribunal at The Eighteenth Meeting Of States Parties To The Convention On The Law Of The Sea,” June 16, 2008.

29. The first 8 contracts from “Selected Decisions and Documents of the Seventeenth Session (11 – 22 July 2011),” International Seabed Authority, Jamaica, 2011. Information on the final contract is from a Ministry of Natural Resources and Ecology of the Russian Federation press release, October 29, 2012.

30. Thomas J. Donohue, “Letter in Support of the Law of the Sea Treaty,” July 27, 2012. Available at http://www.uschamber.com/issues/letters/2012/letter-support-law-sea-treaty.

31. Steven Groves, “U.S. Accession to UN Convention on the Law of the Sea Unnecessary to Develop Oil and Gas Resources,” Heritage Foundation, Backgrounder No. 2688, May 14, 2012. Available at http://www.heritage.org/research/reports/2012/05/us-accession-to-un-convention-on-the-law-of-the-sea-unnecessary-to-develop-oil-and-gas-resources.

33. Agreement with the Union of Soviet Socialist Republics on the Maritime Boundary, Treaty Doc. 101–22, U.S. Senate, 101st Cong., 2nd Sess., September 26, 1990. Available at http://www.state.gov/documents/organization/125431.pdf.

34. American Law Institute, Restatement of the Law, Third, of the Foreign Relations Law of the United States, Vol. 2 (St. Paul, Minn.: American Law Institute Publishers, 1987), § 523, reporter’s note 2.

39. Donald R. Leal, “Homesteading the Oceans: The Case for Property Rights in U.S. Fisheries,” Political Economy Research Center, Policy Series, No. 19, August 2000. Available at http://perc.org/sites/default/files/ps19.pdf.

40. Article 144.

41. Article 202.

42. Article 203.

43. Mahathir Min Mohammad, statement to the General Assembly of the United Nations, 1982.

44. Article 194.

45. U.S. Environmental Protection Agency, “Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act; Final Rule,” Federal Register, Vol. 74, No. 239, December 15, 2009.

46. Christopher C. Horner, “Law of the Sea Treaty May Deliver More than Expected,” Wall Street Journal, October 11, 2011. Available at http://online.wsj.com/article/SB10001424052970203633104576623412690169344.html.

49. William C. G. Burns, “Potential Causes of Action for Climate Change Damages in International Fora: The Law of the Sea Convention,” International Journal of Sustainable Development Law & Policy, Vol. 2, No. 1, 2006Development Law & Policy, Vol. 2, No. 1, 2006, pages 27-51.

50. Jeremy Rabkin, “The Law of the Sea Treaty: A Bad Deal for America.”

51. Rio Declaration on Environment and Development, The United Nations Conference on Environment and Development, Rio de Janeiro, June 14, 1992. Available at http://www.unep.org/Documents.Multilingual/Default.asp?documentid=78&articleid=1163.

53. Joint Declaration of Vice President Wolfrum and Judges Caminos, Marotta Rangel, Yankov, Anderson and Eirikson, International Tribunal for the Law of the Sea, 1-20. August 27, 1999.

54. Alana R. Rubin, “Rock the Boat: The Plight of the Southern Bluefin Tuna,” Michigan State University College of Law, 2007. Available at http://www.animallaw.info/articles/ddusbluefintuna.htm.

55. Statement by H. E. Judge Rüdiger Wolfrum, President of the International Tribunal for the Law of the Sea,to the International Law Commission, Geneva, July 31, 2008. Available at http://www.itlos.org/fileadmin/itlos/documents/statements_of_president/wolfrum/ilc_geneva_31.07.08_eng.pdf.

56. The MOX Plant Case (Ireland v. United Kingdom), 126 I.L.R. 334 (International Tribunal for the Law of the Sea, 2001). Available at http://www.itlos.org/start2_en.html.

57. See, for example, Fred L. Smith Jr., testimony before the U.S. Senate Foreign Relations Committee on the Law of the Sea Treaty, Competitive Enterprise Institute, October 4, 2007. Available at http://cei.org/outreach-regulatory-comments-and-testimony/testimony-us-senate-foreign-relations-committee-law-sea-t.

58. Sen. John Kerry, “Law of the Sea: A National Security Issue That Unites,” Huffington Post, June 14, 2012. Available at http://www.huffingtonpost.com/john-kerry/a-national-security-issue_b_1596414.html.

59. United Nations, “United Nations Conventions On The Law Of The Sea,” December 1982, Part XI, Section 4, Article 164.